EXPLANATORY STATEMENT

Carbon Credits (Carbon Farming Initiative) Act 2011

Carbon Credits (Carbon Farming Initiative—Community Buildings) Methodology Determination 2016

EXPOSURE DRAFT

Background: Emissions Reduction Fund

The Carbon Credits (Carbon Farming Initiative) Act 2011(the Act) enables the crediting of greenhouse gas abatement from emissions reduction activities across the economy. Greenhouse gas abatement is achieved either by reducing or avoiding emissions or by removing carbon from the atmosphere and storing it in soil or trees.

In 2014, the Australian Parliament passed the Carbon Farming Initiative Amendment Act 2014, which establishes the Emissions Reduction Fund (ERF).The ERF has three elements: crediting emissions reductions, purchasing emissions reductions, and safeguarding emissions reductions.

Emissions reduction activities are undertaken as offsets projects. The process involved in establishing an offsets project is set out in Part 3 of the Act. An offsets project must be covered by, and undertaken in accordance with, a methodology determination.

Subsection 106(1) of theAct empowers the Minister to make, by legislative instrument, a methodology determination. The purpose of a methodology determination is to establish procedures for estimating abatement (emissions reduction andsequestration) from eligible projects and rules for monitoring, record keeping and reporting. These methodologies will help ensure that emissions reductions are genuine—that they are both real and additional to business-as-usual.

In deciding to make a methodology determination the Minister must have regard to the advice of the Emissions Reduction Assurance Committee (ERAC), an independent expert panelestablished to advise the Minister on proposals for methodology determinations. The Minister must not make or vary a methodology if the ERAC considers it inconsistent with the offsets integrity standards, which are set out in section 133 of the Act. The Minister will also consider any adverse environmental, economic or social impacts likely to arise as a result of projects to which the determination applies.

Offsets projects that are undertaken in accordance with a methodology determination and approved by the Clean Energy Regulator (the Regulator) can generate Australian Carbon Credit Units (ACCUs), representing emissions reductions from the project.

Project proponents can receive funding from the ERF by submitting their projects into a competitive auction run by the Regulator.The Government will enter into contracts with successful proponents, which will guarantee the price and payment for the future delivery of emissions reductions.

Further information on the ERF is available on the Department of the Environment website at:

Background: Community buildings

The exposure draft Carbon Credits (Carbon Farming Initiative—Community Buildings) Methodology Determination 2016 (the draft Determination)sets out proposed rules for implementing and monitoring offsets projects that reduce greenhouse gas emissions associated with the consumption of electricity and/or fossil fuels at community buildings.

Most greenhouse gas emissions generated by community buildings are indirect (scope 2) emissions, primarily from electricity that is consumed in the building. Community buildings can also generate direct (scope 1) emissions through direct fuel combustion in, for example, boilers and gas heaters.

The draft Determination uses a simple measured comparison of whole-of-building energy consumption before (baseline) and after (project) implementing energy efficiency activities to estimate emissions reductions. Buildings that are suitable for such an approach either have energy consumption that remains reasonably stable regardless of the level of service provided by the building; or have energy consumption that exhibits a simple and strong correlation with a small number of parameters that reflect the level of service provided by the building.

The types of community buildings covered by the draft Determination are:

  • public facilities, e.g. libraries, information centres, town halls, galleries and museums;
  • private galleries and museums;
  • schools;
  • hospitals;
  • aged care facilities;
  • common areas of residential apartment complexes; and
  • serviced apartment complexes.

The draft Determination provides flexibility for project proponents to undertake a broad range of energy efficiency activities and to determine what activities are most appropriate for each building. Examples of activities that may contribute to emissions reductions under the draft Determination include:

  • modifying, installing, removing or replacing energy-consuming equipment or equipment that generates electricity in the building, such as:
  • upgrading lighting systems;
  • replacing heating, ventilation and air conditioning systems with more efficient technologies and designs;
  • upgrading boilers to more efficient, better controlled designs;
  • installing a co-generation unit;
  • making changes to the building shell to reduce the energy requirements of the building, such as;
  • improving the insulation value of glazing, for example by installing secondary glazing;
  • installing additional insulation in walls, ceilings or under floors;
  • changing how energy-consuming equipment is controlled or operated, such as:
  • installing motion sensors or sensor lights;
  • adopting improved building energy management systems that automatically manage energy consumption;
  • changing the energy sources used by equipment, such as
  • fuel switching from diesel to natural gas; and
  • promoting energy-conserving behaviours to building occupants.

Project proponents who could use the determination once it is made include owners, operators or tenants of community buildings covered by the draft Determination, energy efficiency service providers and manufacturers or suppliers of equipment or services used in the upgrade of these buildings.

The draft Determinationcomplements the existing Carbon Credits (Carbon Farming Initiative—Commercial Buildings) Methodology Determination 2015(Commercial Buildings method). It applies to types of buildings that are not covered by the Commercial Buildings method which relies on theNational Australian Built Environment Rating Scheme framework to calculate abatement. This broadens coverage of methods across the building sector. In developing the draft Determination the Department has sought to maintain consistencywith the Commercial Buildings method, as far as practicable, to ensure the two methods deliver comparable results.

Application of the draft Determination

The draft Determination sets out proposed rules for implementing and monitoring offsets projects that reduce greenhouse gas emissionsassociated with the electricity and fuel consumption of community buildings.These rules have been designed to reflect the requirements of the Act’s offsets integrity standardsto help ensure that emissions reductions are real and additional to business-as-usual.The offsets integrity standards require that an eligible project should result in carbon abatement that is unlikely to occur in the ordinary course of events and is eligible carbon abatement under the Act. In summary, the offsets integrity standards also require that:

  • amounts are measurable and capable of being verified;
  • the methods used are supported by clear and convincing evidence;
  • material emissions which are a direct consequence of the project are deducted; and
  • estimates, assumptions or projections used in the determination should be conservative.

Project proponents wishing to implement projects under the draft Determination, once it is made, must make an application to the Regulator under section22 of the Act. They must also meet the general eligibility requirements for an offsets project set out in subsection 27(4), which include compliance with the requirements set out in the draft Determination, and the additionality requirements in subsection 27(4A) of the Act. The additionality requirements are:

  • the newness requirement;
  • the regulatory additionality requirement; and
  • the government program requirement.

The government program requirement is provided for in the Carbon Credits (Carbon Farming Initiative) Rule 2015. Subsection 27(4A) of the Act provides that a methodology determination may specify requirements in lieu of the newness requirement or the regulatory additionality requirement. The draft Determination does not specify any requirements in lieu of the newness requirement or the regulatory additionality requirement, and so the general requirements would apply to community buildings projects.

Public consultation

The draft Determination has been developed by the Department of the Environment in collaboration with the Regulator and a technical working group of experts from the built environment and energy efficiency sectors. The technical working group reviewed a version of the determination prior to the release of thisexposure draft for public consultation.

Thisexposure draft has been published on the Department’s website for public consultation from 8 March 2016 to 5 April 2016. Details for how to make a submission are provided on the Department of the Environment website,

Draft Determination details

The draft Determination will be a legislative instrument within the meaning of the Legislative Instruments Act 2003.

Details of the draft Determination are at Attachment A.

Note on this explanatory statement

Numbered sections in this draft Explanatory Statement align with the relevant sections of the draft Determination. The definition of terms highlighted in bold italics can be found in the draft Determination.

Attachment A

Details of the Methodology Determination

Part 1 Preliminary

1Name

The full name of the draft DeterminationistheCarbon Credits (Carbon Farming Initiative—Community Buildings) Methodology Determination 2016.

2Commencement

Section 2 provides that the draft Determination would commence on the day after it isregistered on the Federal Register of Legislative Instruments.

3Authority

Section 3 provides that the draft Determinationwould be made under subsection 106(1) of theAct.

4Duration

Under subparagraph 122(1)(b)(i) of the Act, a methodology determination remains in force for the period specified in the determination. The draft Determination, once made, would remain in force for the duration set out in this section unless revoked in accordance with section 123 of the Act or section 42 of the Legislative Instruments Act 2003.

Section 4 provides that the draft Determinationwould be in force from its commencement (asprovided for in section 2) until the day before it would otherwise be repealed under subsection50(1) of the Legislative Instruments Act 2003.

Instruments are repealed under that provision on the first 1April or 1 October following the tenth anniversary of registration of an instrument on the Federal Register of Legislative Instruments. In accordance with subparagraph 122(1)(b)(i) of the Act, paragraph4(b) of the draft Determination sets out the time that the draft Determination would expire.

If the draft Determination expires in accordance with section 122 of the Act or is revoked under section 123 of the Act during a crediting period for a project to which the draft Determination applies, the draft Determination would continue to apply to the project during the remainder of the crediting period under subsections 125(2) and 127(2) of the Act. Project proponents may apply to the Regulator during a reporting period to have a different methodology determination apply to their projects from the start of that reporting period (seesubsection 128(1) of the Act).

Under section 27A of the Act, the Emissions Reduction Assurance Committee may also suspend the processing of applications under a determination if there is reasonable evidence that the methodology determination does not comply with one or more of the offsets integrity standards. This does not impact applications for declaration already received by the Regulator before such a suspension or declared eligible offset projects which apply the draft Determination.

5Definitions

Section 5 defines a number of terms used in the draft Determination.

Generally, where terms are not defined in the draft Determination but are defined in section 5 of the Act, they have the meaning given by the Act.

Under section 23 of the Acts Interpretation Act 1901, words in the draft Determinationin the singular number include the plural and words in the plural number include the singular.Key definitions in section 5 of the draft Determination include those set out below.

excluded function is defined in section 14, which provides thata proponent could declare a coreoutsourcable function or a non-core function undertaken at a sitean excluded function. Under the draft Determination, energy consumption associated with a function that is declared excluded can be subtracted from the site’s energy consumption when working out the baseline and reporting period emissions. This allows a proponent to exclude energy consumption associated with a function that a proponent does not have direct control over (in the case of non-core functions) and also ensures genuine abatement in the case where a core function is outsourced. Schedule 2 details the functions that may be declared excluded for the different types of community buildings. Excluded functions are explained in more detail under Part 3.

net abatement amount is defined by reference to a community buildingsproject for a reporting period to mean the carbon dioxide equivalent net abatement amount for the project in the reporting period for the purposes of paragraph 106(1)(c) of the Act. The term is used throughout the draft Determination and has been included to assist with readability.

siteis defined in subsection 8(2),and is the smallest unit of a project under the draft Determination. It refers to a building, part of building or number of buildings that together constitute: a public facility; a private gallery or museum; a school; a hospital; an aged care facility; the common area in a residential apartment complex; or a serviced apartment complex.

subsidised renewable electricity is defined as renewable electricity generated and consumed onsite from renewable sources using equipment that receives subsidies under another government program(such as the Renewable Energy Target), and that was installed at the site after the start of the baseline period. This relates to the government program requirement under the Act (subparagraph 27(4A)((c)(ii)) which has the effect of not allowing subsidised renewable electricity to be counted towards an offsets project’sabatement as this would result in the abatement being subsidised twice. The draft Determination excludes these emissions reductionsfrom abatement calculations by including the equivalentgrid energy consumption in the calculation of project emissions (equation 4 in section 30).

subsidised solar water heater is defined as a solar water heater that receives subsidies under another government program such as the Renewable Energy Target, and that was installed at the site after the start of the baseline period. This relates to the government program requirement under the Act (subparagraph 27(4A)((c)(ii)) which has the effect of not allowing emissions reductions associated with the subsidised solar hot water system to be counted towards an offsets project’sabatement as this would result in the abatement being subsidised twice. The draft Determination excludes these emissions reductionsfrom abatement calculations by including the equivalentgrid energy consumption in the calculation of project emissions (equation 4 in section 30).

6References to factors and parameters from external sources

The calculation of the net abatement amount in the draft Determination includes factors and parameters determined from other sources, such as the NGER (Measurement) Determination.

Section 6 specifies that such factors or parameters should be determined by using the version of the external source that is current at the end of the reporting period, unless the draft Determination specifies otherwise.

7Assessing level at which a function was performed during a period

Section 7 sets out rules forassessing the level at which a function listed in Schedule 2 was performed during a period and for determining whether the level at which a function was performed during the baseline period has changed.

Subsection 7(2) sets out rulesfor determining whether a function has been performed at a material level at a site over a period (relevant to paragraphs17(1)(g) and 36(1)(a)). If in performing a function, the function only has a minor or trivial effect on abatement for the site, then the function is considered to not have been performed. If however in undertaking the function, the function has more than a minor or trivial effect on abatement, then the function is taken to have been performed for the whole period at a material level.

Subsections 7(3), 7(4) and 7(5) set out rules for determining whether the level at which a function was performed during a measurement period has changed compared to the level during the baseline period (relevant to paragraph 17(1)(g)).

Subsection 7(3) requires that the level be assessed using a measure appropriate to the function in question as listed in table 2 in Schedule 2, such as number of meals, or area of a retail shop.

Subsection 7(4) states that if the level of afunction decreasesfrom the baseline to the reporting period by less than 10 per cent, then it is taken to be no less than the baseline level.

Subsection 7(5) also allows for circumstances where the decrease in the level of the function is greater than 10 per cent, but that decrease has an effect on abatement for the site that is minor or trivial. In such circumstances the level during the measurement period is taken to be the same as in the baseline period.

Subsections 7(4) and 7(5), together with subparagraph 17(1)(g)(i),allowa proponent to include a site in the abatement calculations even when a function performed at the site in a measurementperiod is lower than that in the baseline period, as long as the difference is minor. This could apply, for example, in the case of a hospital that had been doing towellaundry onsite for an entire measuring period, except for one week when the boiler supporting the laundry service was being serviced. As long as thequantity of towels laundered during the measurement period was not less than 90 per cent of the quantity laundered in the baseline year,or the effect of the difference on the abatement for the site is minor or trivial, the level during the measurement period is taken to be the same as the baseline period. Should the quantity of towels laundered in the measurement period be less than 90 per cent of the quantity laundered in the baseline period, and have an effect on overall site abatement that is not minor or trivial, the proponent must not include the hospital in the abatement calculations unless the towel laundry service is separately metered and has been declared as an excluded function for the measurement period in accordance with section 14.

Part 2Community building projects

8Community building projects

The effect of paragraphs 27(4)(b) and 106(1)(a) of the Act is that a project must be covered by a methodology determination, and the methodology determination must specify the kind of offsets project to which it applies.